Wednesday, May 25, 2011

Romania Will Try and Limit Leu Moves on ‘Massive’ Inflows

The Romanian central bank will try and limit exchange-rate volatility as “probable massive foreign capital inflows’’ put pressure on the leu to appreciate, Governor Mugur Isarescu said.

Inflows of capital to Romania will force the bank to make difficult monetary-policy decisions and use “unorthodox measures’’ to prevent exchange-rate volatility, Isarescu said in a speech at a seminar in Bucharest today.

The leu has gained 3.6 percent against the euro this year, the second-best performer in central and eastern Europe after the Serbian dinar, Bloomberg data show. It weakened 0.16 percent to 4.1280 per euro as of 11:22 a.m. in Bucharest.

“It’s probable that we’ll enter a new era of massive capital inflows to Romania,” Isarescu said. “A worsening of the Greek crisis could limit them though. But higher capital inflows are inevitable. We’ll try to limit the exchange-rate volatility triggered by these inflows, we’ll try to discourage excessive volatility.’’

Romania’s current-account deficit narrowed 59 percent in the first quarter to 634 million euros ($890 million) as foreign direct investments into the Balkan country fell 22 percent to 379 million euros from 486 million euros in the same period of 2010.

Foreign direct investments in Romania peaked at 9.5 billion euros in 2008 and tumbled to 3.5 billion euros in 2009 and 2.6 billion euros in 2010.
‘Certain Cost’

There is a “certain cost” in fighting any appreciation of the currency if the amount of capital entering the Balkan nation increases, Isarescu said.

“Capital inflows can lead to exchange-rate appreciation,” he said. “We lived through an appreciation once, we bought 10 billion euros in 2006 and 2007 and we couldn’t stop the appreciation, which shows there are certain limits” to fighting the flow.

The Banca Nationala a Romaniei left the benchmark interest rate unchanged for a 12th consecutive month on May 3 and raised the inflation rate forecast for the end of the year to 5.1 percent from 3.6 percent.

The inflation rate stood at 8.3 percent in April, the European Union’s highest. The rate will remain above the central bank target range of 2 percent to 4 percent until next year, the bank said. The central bank is “reluctant” to use the leu as a tool to damp inflation, Isarescu said on May 5

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net; Irina Savu in Bucharest at isavu@bloomberg.net

To contact the editor responsible for this story: James M. Gomez in Prague atjagomez@bloomberg.net

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